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McKinsey&CompanySeptember 2010

McKinsey Consumer and Retail

Whats next: Rebirth of Luxury

Brent Hooper Marco Mazz Demetra Pinsent Nathalie Remy

Whats next: Rebirth of LuxuryAs the global markets slowly regain their footing, the business world is left wondering what kind of consumer will emerge from this most recent recession. Looking back over the past two years, it is clear that the difference between the 2008 downturn and its predecessors was that this downturn hit all elements of consumer finances. Unemployment and inflation damaged consumers incomes, while declining equity and plummeting home values attacked their balance sheet. As a consequence, consumers reined in their spending, resulting in a reduction in consumer demand that affected all sectors and industries. For example, quarterly sales of luxury houses rose 13% on average in the years leading up to the recession (2006-2008), but fell by 5% during 2009.1 So, how can companies best respond to the new luxury environment? Recently, Luxury has been signaling a rebound, as shown by the quarterly results of major companies such as LVMH and Burberry, but given these turbulent forces and the consequent changes in spending behavior, the luxury industry needs to ask itself who the post-recession luxury consumer is, how he or she will (re)engage with luxury goods and what all this means for industry growth opportunities. As part of a global effort to understand emerging luxury consumer attitudes and behaviors, McKinsey recently surveyed more than 5,000 luxury consumers in Europe.2 Our findings point to four fundamental shifts in luxury consumer behavior that may last beyond the crisis.

As with non-luxury consumption,

luxury consumers are both trading down and reining in their spending. In part, this is driven by reduced foreign travel: business travel is down 30% and hotels in such popular shopping destinations as Paris, New York, London, Madrid, Hong Kong and Dubai saw their revenues per available room fall by 25-40% in 2009.

Increasing social pressure is creatinga backlash in society against conspicuous consumption.

Consumers are redefining value,

showing a renewed preference for timeless luxury over trendy fashion.

Luxury consumers are increasinglybuying their products of choice online and via other non-traditional channels. The impact of these trends is particularly noticeable in developed luxury markets. More than 50% of European luxury consumers traded down by purchasing less during the past 12 months; in developing markets such as China, this figure was just 8%. Far from a temporary behavioral change, this reduced spending may turn into a longer-term industry trend. Looking forward, sales could potentially decrease even further: some 67% of consumers stated that they are either postponing or no longer considering specific luxury purchases. In this article we take a detailed look at each of these four trends and their potential impact on the industry. Subsequently, we describe a set of opportunities for luxury manufacturers and retailers to pursue going forward.

1 Includes Bulgari, Burberry, Herms, LVMH, Gucci Group and Tods. Richemonts 2010 annual growth was similarly 4%. 2 McKinsey primary consumer research of luxury consumers in the UK, France and Italy (March 2010).

2

European luxury consumer trendsValue: Careful consumption extends into luxury To compensate for declining financial health, todays consumers are imposing their own domestic austerity measures. Luxury consumption is not immune to these. As with broader, non-luxury consumption, luxury consumers increasingly seek value for their purchases. This translates into both renewed price sensitivity and a re-thinking of each individual spend decision. Consumers are trading down to lower-priced items and using the internet to compare prices. At the same time, they are controlling their spending by limiting purchases to special occasions. The resulting discount dynamic can be observed in all the European markets we surveyed. Nearly one-third of European consumers indicate that they intend to seek discounts on future luxury purchases. This figure ranges from 28% in France and 30% in Italy up to 34% in the UK. In practice, this trend is both shifting purchases towards discounted items and driving consumers towards discount outlets. Todays luxury consumers readily admit that they are as likely to shop in discount stores and outlet malls as in more traditional luxury outlets (Figure 1). In addition to the discount dynamic, value-seeking has also altered the typical justification for a luxury purchase. Consumers in our survey no longer describe themselves as consciously looking for the latest trends, but rationalize their luxury purchases by referring to exceptional splurges. Thus, for instance, 38% of consumers said they would make a luxury purchase as a special splurge, while only 24% would do so to regularly reward themselves. This figure drops to just 6% of consumers who would purchase a luxury good to augment their existing wardrobe.Figure 1

Discount dynamicWhere do you purchase luxury items? Percent of respondents multiple choices allowed

36

45 16 14

35

37

42 13 17

49 20 27

62 34n/a Upscale department store (e.g. Harrods) Department store chain Brand boutiques Specialty store Off-price store (e.g. TJ Maxx) Outlet store

28

31 18

SOURCE: McKinsey primary consumer research

The shift to value varies depending on the category in question. This is particularly noticeable in Italy, where 85% of apparel and accessory consumers have changed either how much or where they shop. Least affected are fragrances and watches (Figure 2).Figure 2

Trading down across categoriesFor items purchased in the past 12 months, which of the following is true? Percent of respondents multiple choices allowed

Buying at stores with lower prices Buying only when on sale Buying less often than in the past Switching to less expensive brands Delaying purchases Have not really changed how much or where I buy

34

41

32

28

19

21

12

25

23

29

30

14

15

22

21

27

23

27

34

30

22

13

18

19

14

16

12

19

7

1

3

2

3

5

7

15

15

19

19

27

31

24

SOURCE: McKinsey primary consumer research

3

Values: Responsible consumption Amidst the recessions bank bailouts and swelling unemployment lines, we saw the emergence of anti-luxury social pressure. This resulted in a backlash against the conspicuous consumption of recent years. One notable sign of this is the plain paper bags offered to luxury consumers during the 2008 sale season in Europe. Even among those consumers still buying luxury items, few feel it appropriate to broadcast their purchase to the world. This is most pronounced in the UK, where 34% of consumers consider such conspicuous consumption to be in bad taste, and UK Vogue has recently reintroduced its hallowed More Dash Than Cash section. But the sentiment is shared in other markets, including 20% of French consumers and 25% of Italian consumers. One straw in the wind: the FTs How To Spend It recently noted a trend towards smaller, flatter, less conspicuous mens watches, down from their 44mm heyday to a more discreet 40 or 38mm. As well as inconspicuousness, there are some signs that consumers seek to practice a more responsible consumption aligned with popular social concerns. Common causes include environmental sustainability, personal health and wellness and fair/ethical trade. While these values are top-of-mind for consumers, however, they have yet to truly shift consumption patterns. Only around 15-20% of consumers are sufficiently proactive or committed to these causes to let them affect their purchasing behavior or the amount they are willing to pay.3

Respect me: Personalization, statement, investment The third trend we observed was a changing definition of personal luxury, as more and more consumers describe their luxury purchases as investments. They told us that they are more likely to pay full price for items they perceive as classic, core or traditional rather than for those they found beautifully designed (Figure 3). This reflects a desire for timeless, everlasting style and authentic heritage: it benefits brands who can demonstrate these qualities. Buying a luxury item as an investment and potentially as a family heirloom for future generations does not mean that the buyer wants to forego personalization. On the contrary, consumers see their luxury purchases as opportunities to express their individual tastes. Examples of this are already all around us and we can expect to see more.

Personalization can come in the form of custom products, such as bespoke suiting or fragrances. It can also be provided through individualized service. Hotels, for example, have made effective use of their CRM systems to capitalize on this and drive loyalty by catering to individual needs. Many now pre-identify guests to provide them with preferred services upon arrival, including preferred pillow service and pet pampering. In the mind of the consumer, these individual benefits can, in turn, justify the premium pricing of luxury goods and services. The price corresponds with the perceived personal value to the consumer. In a potential paradox, consumers are now willing to pay even higher prices for a personalized, authentic luxury than they were for the must-have handbag of a few seasons back.

Figure 3

Seeking authenticityWhen shopping for luxury b